Trichet and the truth about his legacy

Commentary: He’s no longer so proud to be ‘Mr. Euro’

BERLIN (MarketWatch) — Jean-Claude Trichet may go down as the most communicative central bank chief in history. And the one most anxious about his legacy.

Far more intensively than other central bank leaders of the past 20 years — the likes of Alan Greenspan, Ben Bernanke, Karl Otto Pöhl, Mervyn King, Wim Duisenberg — the outgoing president of the European Central Bank has fired off a continuous flare of media fireworks on all fronts during his eight years in the job. It’s hard to believe — especially given the worsening political and economic position in Italy — that his cautious successor, Mario Draghi, will be so voluble.

Trichet has put a lot of effort into building a legend as an assiduous preacher of coming euro troubles. Someone who was ahead of the curve in predicting the European debt crisis. Certainly Trichet warned from time to time in 2007-08 that the financial markets were not giving due attention to risks — particularly in the derivatives markets — and “repricing” would ensue. Warnings against “complacency” were regular features of his speeches and interviews.

Reuters

European Central Bank President Jean-Claude Trichet steps down at the end of the month.

However, this was not really that unusual. What central banker would march to a podium, complement his audience on their naiveté and tell them that central bankers were “complacent” about the future?

A selective compilation of Trichet’s statements before 2007-08, echoed in some of his recent declarations, gives the impression that he was blessed with Cassandra-like qualities. If only others had paid more attention to his wisdom, we would have been spared all this euro chaos!

The real story, however, is somewhat askew from the authorized version. In fact, in several different areas, Trichet himself gave plentiful public and private support to phenomena which, as later became evident, sowed the seeds of gathering crisis.

Trichet did himself and the euro no good, for example, by continually stressing in his early years in his post that he was the key person in Europe responsible for the currency’s sanctity. “I have said often enough that I am Mr. Euro,” he told a press conference in June 2006. “There is no doubt: we issue the currency and I sign the banknotes.”

French banks avoided IMF oversight

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WSJ's David Gauthier-Villars reports on a significant contribution to the current Euro banking and debt crisis: Two years ago, French banks tried to persuade the International Monetary Fund that concerns about their health were unfounded. Photo: Ethan Miller/Getty Images

Part of a turf war with Jean-Claude Juncker, the Luxembourg prime minister and head of the “Euro Group” of single-currency finance ministers, Trichet’s stand reinforced the erroneous idea that the ECB had everything under control. It arguably helped prevent preparation of a fully worked out political plan in the event of a crisis. From an October 2011 perspective, Trichet’s behavior seems unwisely high-handed — and he was even reprimanded for it by allies such as Edouard Balladur, the former French prime minister.

Needless to say, now that Trichet likes to pass to governments as much blame as possible for the euro’s troubles, the self-description “Mr. Euro” is no longer part of his vocabulary.

In another sign of changing practices, earlier in the euro’s life Trichet liked to ascribe to the successful workings of the ECB’s monetary policy the precipitous fall in bond yields for the euro’s over-indebted peripheral states.

This is now held up as an example of market mispricing, which led to self-fuelling increases in these states’ indebtedness. In May 2008, he put it positively: “From the very beginning, the successful launch of the euro and the strong credibility of the newly created monetary authority led to a convergence of market interest rates at all maturities around the lowest interest rates prevailing prior to the euro.”

Judging by a recent interview, Trichet has now changed his tune, blaming the phenomenon on “benign neglect, at the global and European levels which was shared by financial markets, by the mainstream of economic analysis and by executive branches.” In other words, something over which the ECB had no control.

Still more significantly, for years Trichet maintained a paean of praise for the stabilizing effect of European financial integration, particularly in the bond markets. “The better diversification and sharing of risk brought about by financial integration helps to fulfill the conditions for the optimality of a currency area,” he announced in January 2006. In the meantime, the mutual interlocking of debtors and creditors on European bond markets has become a destabilizing factor: the opposite of what was intended.

Success has many fathers, failure is an orphan. It would be ridiculous to make Trichet and the ECB solely responsible for all the euro’s problems. Trichet deserves praise where it is due for support measures marshaled by the ECB in the 4-1/2 years since the outbreak of the financial crisis. Yet, when we survey Europe’s troubles, it would be equally absurd to absolve from blame some policies that Trichet once backed with ill-judged verve — but would now prefer to forget.

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